SEC Probes Silver Lake Over Fees

Investigation is part of regulator’s broad push to make sure buyout firms are being upfront with investors

The Securities and Exchange Commission is investigating whether private-equity firm Silver Lake properly disclosed fees it earned when selling companies or taking them public, part of the regulator’s expansive push to make sure buyout firms are being upfront with investors.

The SEC is looking into one-time “accelerated monitoring fees” that Silver Lake collected when it sold companies or took them public, according to people familiar with the matter and Silver Lake investor letters reviewed by The Wall Street Journal.

Buyout firms like Silver Lake collect a range of fees from both portfolio companies and directly from the funds they raise to buy the companies. The SEC has pressured firms to disclose more about these fees to fund investors, typically pensions, endowments and wealthy individuals.

The SEC’s Silver Lake investigation is continuing and may not result in any action, but the inquiry is another sign that the agency is taking a broad view of its ability to monitor the $4.2 trillion private-equity industry.

“We believe the SEC’s review of Silver Lake is consistent with the SEC’s industry-wide approach to private equity firms generally, and Silver Lake is voluntarily responding to the SEC’s request for information about these issues,” the company wrote in a letter to investors earlier this year.

In recent years, the SEC has stepped up its surveillance of buyout firms over fees the agency says weren’t sufficiently disclosed to investors. The agency began looking into the issue after the 2010 Dodd-Frank Act granted the regulator increased oversight of hedge funds and private-equity firms.

Blackstone Group LP last year agreed to pay about $39 million to settle SEC civil charges over some of its fee practices, following the agency’s $30 million settlement with KKR & Co. over expense allocations. In November, Fenway Partners LLC reached a $10.2 million settlement with the SEC over disclosure charges.

Buyout executives said the fees they charge are the product of negotiations with highly sophisticated investors who have been able to extract concessions over the years.

Silver Lake, founded 17 years ago at the height of the dot-com boom, has $24 billion in assets under management. The Silicon Valley-based firm in 2013 joined with Michael Dell to take his eponymous computer company private and was an early backer of Chinese e-commerce company Alibaba Group Holding Ltd.
The SEC’s Silver Lake investigation focuses on the firm’s collection of accelerated-monitoring fees, a controversial practice that some firms have abandoned due to regulatory pressure.

Behind those fees are contracts between private-equity firms and the companies they buy, which spell out consulting, or “monitoring,” fees that will be paid over a number of years, often a decade or longer. Some private-equity firms accelerate the payment of the fees when the company is sold or goes public, taking a lump-sum payment to make up for years of consulting work the buyout firm will never perform.

The SEC has faulted other firms, including Blackstone, for allegedly not disclosing the fees to investors before they committed money to the funds or at the time the monitoring agreements were written. Blackstone in late 2014 said that it would mostly stop accelerating the payment of monitoring fees.

SEC examiners reviewed Silver Lake in July 2014, combing through records that dated back six years, and issued the firm a deficiency letter outlining problems in July 2015, according to investor materials reviewed by the Journal. The firm told investors its two top compliance officers, “both former SEC enforcement attorneys,” managed its responses.

The SEC’s enforcement investigation began in December 2015, according to investor materials.

In a November 2015 letter reviewed by the Journal, Silver Lake told investors in one of its funds that it had twice received these lump-sum fees before 2015 but shared 65% of the income with investors, reducing the management fees investors would otherwise have paid to Silver Lake. The firm told investors they were better off than if Silver Lake hadn’t accelerated the payments.

In another instance in which Silver Lake hadn’t yet decided to take the consulting payments, Silver Lake wrote that its investors would “be better off by approximately $1.5 million if we opt to accelerate the monitoring fee.”

In the letter, Silver Lake said no investors had complained about the fees, which it said were “specifically referred to” in contracts between the firm and its investors, known as limited partnership agreements. The firm told investors in a separate letter in December 2015 that the “ultimate outcome of these matters is not yet determinable.”

Silver Lake has revised its mandatory investor brochure, known as a Form ADV, to make clear that it can accelerate monitoring fees, according to the November 2015 letter.